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Asia's Big-Project Funding Gap

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This luxury high-rise, now complete, is the second-tallest building in The Philippines.

In January, with much fanfare (and $100 billion in capital), the Asian Infrastructure Investment Bank (AIIB) commenced operations under a mandate to help finance Asia’s vast need for infrastructure. The AIIB has been portrayed in some quarters as competition to the region’s long-standing multilateral development institution, the Asian Development Bank (ADB), which is dominated by the US and Japan. However, rivalry seems irrelevant in the context of $8 trillion worth of projects needing funding; both the AIIB and ADB together are capable of funding only a small portion. With increasing regional integration, cross-border financing is fast rising up the investment agenda—and for good reason. Quality of infrastructure is linked to productivity, and without reforms Asia’s lagging infrastructure threatens to derail the region’s increasingly fragile growth.

A McKinsey report noted that traditionally infrastructure projects in Asia have been funded by governments or domestic banks, with foreign investors excluded. Regional banks, too, have historically played a significant role in infrastructure projects, but just like multilateral banks, they can only go so far.

Analysts say that garnering the support of the private sector is vital, but so-called public-private partnership commitments remain elusive. According to the ADB, private-sector funding accounts for just 20% of infrastructure financing. Part of the problem is the lack of depth in Asia’s debt capital markets, as well as diverse regulatory structures that put off fixed-income investors. That, too, is starting to change.

“In the wake of the financial crisis, we have started to see signs that global private capital is increasingly welcome,” the McKinsey analysts wrote. “Restrictions on foreign investment are easing and a growing number of projects are being carried out under public–private partnerships.” In July, for example, the Philippines’ first public-private-partnership road project, the 2.23 billion Philippine peso ($48 million) Muntinlupa-Cavite Expressway, started operation.

AIIB plans to commit $1.2 billion to projects this year. The bank is helping finance road-building projects in Pakistan, Tajikistan, Uzbekistan and Kazakhstan—all projects where it is working alongside existing entities such as ADB, its Western counterpart, the European Bank for Reconstruction and Development, and the World Bank. Demand will be greatest in the energy and transport sectors, according to McKinsey, because those are the sectors that bolster productivity overall.

To draft a strong bench of infrastructure capital suppliers, governments need to attract long-term, yield-seeking investors, including sovereign wealth funds, pension funds and private equity. Transparency and trust in public-private partnerships will bolster institutional investors’ willingness to stand alongside the AIIB and other such entities in building a better tomorrow.